Bondholders v. Taxpayers

Update: Durbin: Bankers "own" the U.S. Congress

This is an idea gaining increasing currency on making banks healthy, wealthy and lending.

See Reorganising the banks: Focus on the liabilities, not the assets, and Henry Blodget in TechTicker:

From The Business Insider, April 29, 2009:
We are pleased to discover that we're no longer shouting down a rain barrel.

The idea that the government should draw on a massive pot of money available to fix the banks that is NOT coming from the U.S. taxpayer is finally going mainstream!

Today, the NYT's David Leonhardt has devoted an entire column to the idea of making bondholders -- the people who lent the banks the money that they incinerated -- pay for some of the cost of fixing them.

What's more, Leonhardt says that Larry Summers actually mentioned this as a possibility in a TV interview.

Politically, it's not difficult to see how this approach might take the air out of the Republicans' getting all populist on us.

Take this approach combined with the Geithner project, described by Chadwick Matlin as: "A healthy derivative market leads to a healthy bank leads to a healthy economy leads to a healthy life," and you can see some light and a lot of room for Democrats to move right over the Republicans and out of their Battered Wife Syndrome.

Let the Republicans say no, no and get downright abusive and Democrats can get the country moving again.

Jeffrey Sachs: Geithner Plan Is Unconscionable Rip-Off

This developing, weeks-old story is more scary that a bio-engineered, airborne Swine Flu virus invented by a bio-terrorism novelist.

See John Carney's Jeffrey Sachs: Geithner Plan Is An "Unconscionably Large" Rip-Off in Business Insider, and Sachs' piece at Huffington Post. Read his piece a couple of times.

I hope Sachs is way, way off.

Chadwick Matlin has the knockdown of Sachs' concerns at The Big Money from Slate, which you should probably read about three, four times.

Writes Matlin:

... (L)ast time we checked, functional markets have banks buying and selling things with other banks. If we're trying to return to normalcy, why would we stop the very mundane and typical process of banks buying and selling from other banks? Yes, taxpayer money is involved, but it would be involved with whoever bought the assets. I'd rather bail out the banks a little bit further than enter into new pseudo-bailout contracts with hedge funds, who will make the politically deaf banks look like saints.

Some of the attacks rightfully focus on the possibility of collusion. If the banks are buying from one another, they may agree to set a floor for their bids (60 cents to the dollar, when they're really worth 30 cents, for example), then the assets will still be overpriced. If the assets are still overpriced, then we're back where we started from, with immobile assets stuck on balance sheets, slowly draining the life out of zombie banks.

This, though, jumps the gun in two ways. First, we don't know that the banks are colluding. Profit motives suggest that they would, but political pressures suggest they may not be. And it only takes one rogue bank to underbid the cartel and sabotage the plan.

Second, and more likely, the government could set a ceiling to the price of the assets. To understand what this would entail, think about an eBay auction, in which oftentimes the seller will set a price minimum. The minimum prevents the good from being sold unless the winning bid clears the threshold. The Treasury is conducting a reverse auction, so it would set a price maximum, not a minimum. It would say that an asset could not be purchased for more than, say, 40 percent of its original price.

This would warp the market, certainly, but it would also prevent collusion. Plus, it would allow the banks to start acting like banks, just like they were before the crisis hit. That would be good for everybody's confidence.

One thing is certain: Nothing is clear and certain.